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Startup Cfo + Flow Sred Presentation 032409

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A presentation on the R & D tax credit program for Canadian technology companies

A presentation on the R & D tax credit program for Canadian technology companies

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    • 1. Montreal Startup Tax Credit Workshop March 24, 2009 Tax Credits for Startups www.startupcfo.ca www.flowventures.com
    • 2. AGENDA
      • Part I:
        • Money
        • Red Tape
        • Pitfalls
        • How the Government Sees It
      • Part II:
        • Being Eligible
        • Financial Strategies
        • Bad Behaviours
        • Good Behaviours
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 3. An illustration Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 4. The Facts…
      • Raised $ 500K
      • Spent $ 200K on “eligible salaries”
      • $100K of salaries are for founders / specified employees
      • $ 40K of salaries for front end (not “eligible”)
      • $20K subcontractors
      • $ 10K capital expenditures
      • $ 5K materials consumed
      • No IRAP or other grants
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 5. Our filing strategy
      • 1 st claim, so go for maximum (assuming real advancement taking place)
      • Claim SRED for everyone except front end developer
      • Claim proxy method
      • Claim E-biz tax credit for the front end guy
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 6. The Maximum Refund
      • Summary:
      • Bottom Line: Spent $225k, refunded $186,583 (68%)
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 7. SRED Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 8. QC E-Biz Tax Credit
      • E-biz credit: 1/3 salary up to $20K
        • $ 40K * 1/3 = $ 13.3K
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 9. Red Tape
      • And lots of it…
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 10. SRED: Project description
      • Technical description
        • Factual, non-salesy, jargon-free description of
          • Goals for your experimental development, applied research, etc – what technological advancements were you trying to achieve?
          • Obstacles you had to overcome to achieve those advancements?
          • Work performed – “ how ” did you overcome…
          • Results: Advancements in technical knowledge, functionality, etc ( don’t need positive results in order to claim credits )
        • Do these for each project
      • New simplified T661
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 11. SRED: Forms to fill out
      • Federal
      • T2 (Federal Income tax return for corporations)
      • T 661 – Claim for SRED, with Schedules
      • Schedule 31 – Investment Tax Credits
      • Quebec
      • CO-17 (Quebec tax return)
      • RD-222V (SRED claim)
      • RD-1029.7-V (tax credit on salaries)
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 12. SRED: Back-up documentation
      • Technical :
        • Project descriptions and plans
        • Timeline and/or timesheets
        • Test results, QA logs, source code
        • Detailed records of problems encountered (should be compiled throughout the year)
      • Financial
        • Detailed records of money spent (in Canada) on salaries, subcontractors, materials, capital equipment and eligible support expenses
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 13. Timeline….
      • CRA service standard :
        • 120 days from filing to refund
      • Reality:
        • Filed - Month 1
        • Selected for an audit – 4 months later
        • Financial audit – - 2 months later
        • Technical audit – same
        • Asked for backup
        • Write new report – 2 months later
        • 9 months from filing: Still waiting…
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 14. Tax Credit Timeline Your fiscal year Jan Dec Mar Do your taxes Document R&D Prepare claim Apr Jul Wait… Audit $$ Sep 21 Months Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 15. QC E-Biz Tax Credit
      • Annual application for eligibility
        • Corporate
        • Employees
      • Includes:
        • Financial statements
        • Org chart & job descriptions
        • Breakdown of revenues
      • Timing: TBD
      • You can’t double dip!
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 16. Pitfalls
      • Why you might not get the refund you deserve
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 17. Basic SRED Eligibility
      • systematic investigation or search carried out in a field of science or technology by means of experiment or analysis . . . to advance scientific knowledge or to achieve technological advancement
      • Experimental development to achieve technological advancement to create new materials, devices, products, or processes, or improve existing ones;
      • applied research to advance scientific knowledge with a specific practical application in view;
      • basic research to advance scientific knowledge without a specific practical application in view; and
      • support work in engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, etc that directly supports , the eligible experimental development, or applied or basic research.
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 18. SRED in Real Life
      • You have to have legitimate R&D according to their rules
      • You have to speak their language
      • Yes, there is a grey area
      What you did What auditors understand Your SRED claim Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 19. SRED is Getting Tougher
      • Your claim is competing with all other claims they’ve seen (now and in the past)
      • Standard for “innovation” – Could you present your R&D at a conference of industry peers?
      • What did you learn (that wasn’t obvious)?
      • Can you describe (in detail) the activities you did to support your R&D? Do they make sense?
      • Auditors are starting to reject claims or offer only 50%
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 20. SRED: What you can do
      • Have excellent backup documentation
      • Write the claim throughout the year, not at year-end
      • Be very careful with how the claim is written
      • Be prepared for an audit
      • Don’t be too greedy
      • Do not have amounts you owe to the gov’t (e.g. GST/QST)
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 21. QC E-Biz Tax Credit
      • 75% of revenues have to be in an eligible industry:
        • Computer Systems Design and Related Services (NAICS 541510)
        • Software Publishers (NAICS 511210)
        • Data Processing, Hosting and Related Services (NAICS 51821)
      • You have to re-apply each year
      • This is a new program so expect the unexpected
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 22. The Government’s View Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 23. What the gov’t cares about
      • Job creation is the #1 priority
      • They care that your projects “fit” not that they’re “good”
      • Once your file is on their desk their priority is to get it OFF their desk
      • They want to give you the money
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 24. Who are these people?
      • Technical auditors (CRA)
      • Fiscal reviewers (CRA, Revenu Quebec)
      • Investissement Quebec
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 25. Being Eligible Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 26. Good SRED Projects
      • Advancements from an established baseline :
        • Applying new linguistic research into software that improves search results
        • Creating a new architecture that solves security & synch problems in AJAX
        • Creating a faster, smaller runtime environment for interpreted applications on mobile device
      • We took the current state of technology (X) and advanced it (Y) by doing (Z)
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 27. Bad SRED Projects
      • Building features, doing “routine” development
        • I built a content management system
        • We fixed bugs and improved the speed of our Web site
        • Twitter doesn’t work on my TV remote, so I built an app
        • We made our application multi-lingual
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 28. How bad projects can become good Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures Bad Good We built a Twitter client for my TV remote We discovered a method for bi-directional communication via infrared to allow remote control devices to communicate with Web services via the Internet We implemented Soundex to improve search results We improved the efficacy of Soundex by extending it to include semantically similar concepts We built a MMORPG We solved a major problem in distributed computing by creating a new predictive algorithm for minimizing out-of-synch errors among clients
    • 29. SRED Eligibility: Bottom Line
      • Nothing qualifies “automatically”, everything has to be documented and defended
      • Auditor subjectivity plays a big role (unfortunately)
      • The rules change
      • Monthly internal R&D audits ensure you don’t forget what you did which = better backup and bigger claims
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 30. Financial Eligibility
      • Specified vs Regular employees
      • Cdn (eligible) vs foreign contractors (ineligible)
      • Only one person can claim (i.e. you or your sub-contractor)
      • Double-dipping: effect of other tax credits on SRED
      • What if I’m profitable? When do I love CCPC status?
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 31. Optimizing the financial result Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 32. Optimizing your claim…
      • How aggressive should you be?
        • Early years – claim 100% salaries (assuming all of those salaries are being spent on real advancements)
        • Later on – lower the % (because the work mix changes, less real ED)
        • Can shift staff from claiming as SRED to e-biz over time
        • Remember – the program is being strictly enforced (especially for web software)
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 33. Optimizing your claim…(cont.)
      • What records do I need?
        • See the list from our financial audit (above)
        • Timesheets or loose time records
        • ADP, payroll register
        • SIN #s & addresses for all subcontractors
        • Description of work with above credentials on all subcontractor invoices
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 34. Optimizing your claim… (cont.)
      • Hiring vs. outsourcing?
        • Hiring Considerations:
        • Pros:
          • Full time committed team member
          • Advance skill set & capabilities of your company
          • Should be core to your biz
          • Fully eligible for SRED
        • Cons:
          • More expensive (full time cost, benefits, severance, computers, etc)
          • Don’t hire in non-core areas
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 35. Optimizing your claim… (cont.)
      • Hiring vs. outsourcing?
        • Outsourcing Considerations:
        • Pros:
          • Cheaper – pay only for what you need, when you need it
          • 1/2 eligible for SRED
        • Cons:
          • Lose knowledge and skills
          • Can loose time coordinating
        • From a SRED perspective: Goal is to promote employment. Salaries 2x more eligible than subcontractor $.
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 36. Optimizing your claim… (Cont).
      • Financing your credits
        • Options to finance both filed & accrued credits
          • Bank (RBC, Banque Nationale) with Investissement Qc guarantee
          • Several private sources (RD Cap, Accorn, Stanley Finance, Lawrence Group…)
        • Finance up to 75% of filed. Lower % on accrued (usually)
        • All in cost – about 10% (interest & fees)
        • Banks – focus on balance sheet, covenants, history
        • Private – focus on claim quality. More flexible on financial position
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 37. Bad behaviours Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 38. Bad behaviours
      • Hiring too many people / overspending / high salaries:
        • Don’t assume you will get the credits
        • Don’t forget it takes a long time to get your refund
        • Never spend $1 just to get 60 – 75 cents in credits
        • Hire based on clear, strategic need
      • Doing too much :
        • This issue is way beyond tax credits
        • In most markets winner takes all (or most)
        • Best solution does not always win
        • Speed matters. Get into market as early as possible
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 39. Good behaviours Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 40. Good behaviours
      • SRED encourages you to…
        • Have disciplined development practices
        • Have good documentation (Wiki, specs, requirements etc)
        • Understand where you need real R&D and where you can be “good enough”
      • SRED allows you to…
        • Invest in better quality
        • Rewards people via SRED bonuses
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 41. Links and resources Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 42.
      • http://www.cra-arc.gc.ca/sred/ (The Feds)
      • http://www.revenu.gouv.qc.ca/eng/entreprise/impot/societes/credits/rd/ (Quebec)
      • http://irap-pari.nrc-cnrc.gc.ca/main_e.html
      • (Grants)
      • http://www.cra-arc.gc.ca/E/pub/tg/rc4472/rc4472-e.html
      • (program overview)
      • http://www.cra-arc.gc.ca/E/pub/tg/t4088/README.html
      • (guide to filling out the T661)
      • http://www.investquebec.com/en/index.aspx?page=1281
      Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 43. THANK YOU! Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 44. SRED: Financial documentation example Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures
    • 45. SRED: Financial documentation example Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures